ENGM90007: Project Management Practices

Lecture 04
Risk management – Part 2

Dr Omar Castrejon Campos

2023
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 Outline

• Risk Assessment
– Risk identification
– Risk analysis
– Risk evaluation
• Risk Treatment

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Risk Assessment
Risk Assessment

Identification

Analysis

Evaluation
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Risk Identification
 Risk assessment process

The risk assessment process includes:

• risk workshops
• reviews of past project documentation
• talking to the experienced project managers

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 The cone of accuracy

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Source: Project Cost Estimating Manual – Eighth Edition v1.1, Transport and Main Roads, December 2021
 Internal and External factors

Toppinen, Anne et al. (2018). Internal and external factors of competitiveness shaping the future of wooden multistory construction in Finland and Sweden. 8
Construction Management and Economics. 37. 1-16. 10.1080/01446193.2018.1513162.
Risk Analysis
 Risk Management Process (PMBOK)

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Source: [Link]
 Risks vs Uncertainties
Risks Uncertainties
Forecast (e.g. population) within expected range Forecast outside expected range
Designing risk relating to project scope Technological advancements or market disruptions
Due diligence risks (e.g soil contamination) with Future economic conditions, such as strength of Australian
expectations dollar, outside expectations
Stakeholder management issues Future legislative, legal or policy changes at State or
Commonwealth level
Loss of key project staff Conditional outcomes in interdependent investment
projects
Can be managed while striving to deliver intended Cannot be managed unless they were considered in
outcomes framing the investment strategy

• A successful strategy to deal with uncertainty will usually be flexible

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Levels of uncertainty

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 Risk analysis methods
There are two broad ways to analyse risks:
• Qualitative risk analysis
• Quantitative risk analysis

Managing risks requires a combination of varied techniques and

methodologies.

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 Qualitative risk analysis

• Identifies the risks and opportunities and assesses the potential

consequences and treatment (avoid, treat, or minimise)
measures.
• Risk may be qualitatively evaluated through the process of:
– Quantify the likelihood of the risk
– Quantify the impact of the risk
– Manage risk
• The outcomes from this analysis are used as inputs to the
quantitative analysis. 14
 Likelihood
Level Descriptor Description
A Almost certain The event is expected to occur in most circumstances
B Likely The event will probably occur in most circumstances
C Moderate The event should occur at some time
D Unlikely The event could occur at some time
E Rare The event may occur only in exceptional circumstances

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 Impact (or consequence)
Level Descriptor Description
1 Insignificant No injuries, low financial loss
2 Minor First aid treatment, on site release immediately contained, medium
financial loss
3 Moderate Medical treatment required, on site release contained with outside
assistance, high financial loss
4 Major Extensive injuries, loss of production capabilities, off site release
with no detrimental effects, major financial loss
5 Catastrophic Death, toxic release off site with detrimental effect, huge financial
loss

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 Management
Impact / Consequence
Likelihood Insignificant Minor Moderate Major Catastrophic
1 2 3 4 5
A (almost certain) S S H H H
B (likely) M S S H H
C (moderate) L M S H H
D (unlikely) L L M S H
E (rare) L L M S S

H: high risk, detailed research and management required at senior levels

S: significant risk, senior management attention needed
M: moderate risk, management responsibility must be specified
L: low risk, manage by routine procedures 17
 Risk rating – A standard risk matrix

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Source: Kaya, Gulsum. (2018). Good risk assessment practice in hospitals.
 An example

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Source: EP153 Project Risk Context Profiles

Risk index – Risk appetite

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 Quantitative risk analysis

• Estimates
• Sensitivity analysis
• Scenario analysis
• Probabilistic risk analysis
– Simple techniques – expected value
– Advanced techniques – Monte Carlo, Real Options

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What price to consider in a project?

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Sensitivity analysis and scenario analysis

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 Different scenarios
It is common to assign a three-point distribution to specific risks. These three
points represent the ‘best case’, ‘most likely case’, and ‘worst case’ scenario.

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 Value of risk
Value of risk = consequence x probability of occurrence

Expected value = $10,500 25

Decision Trees

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 Quantitative risk analysis

• Traditionally quantitative approach employs probabilistic tools,

techniques, templates and specialist software such as @Risk for
risk evaluation.
• Probabilistic risk evaluation (Monte Carlo simulation) approach is
mandatory for all major projects (in Queensland).

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Project classification and Risk Context Profiles

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 Monte Carlo technique

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Source: Henderson, Brent & Bui, Elisabeth. (2023). Determining Uncertainty in Sediment & Nutrient Transport Models for Ecological Risk Assessment.
 Most common probability distributions
Uniform Triangular

Normal
Discrete All project estimates beyond
the business case milestone
must have P90 confidence
level.

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Source: Project Cost Estimating Manual – Eighth Edition v1.1, Transport and Main Roads, December 2021
 Real Options analysis
• Real options analysis extends the CBA framework

• It is an investment planning, evaluation and decision-making-framework

that incorporates flexible, qualitative and quantitative approaches to
better plan and manage projects with uncertainty

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 Real Options analysis
• A real option comprises:
– Option costs: costs associated with creating flexibility to change
investment strategy and maintain effective access to the option
– Exercise cost: the cost to exercise the option
– Life of an option: the time until the option is no longer valid or available
– Exercise trigger: the conditions that define when a real option should
be exercised

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Real Options analysis

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An example – Pilot plant construction

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 Real Option examples
• Option for future growth
• Option to wait and see
• Option to delay
• Option to expand
• Option to contract
• Option to choose
• Option to switch resources
• Option for phased and sequential investments
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Flexible investment strategies

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Example from DFT

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Example from DFT

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Example from DFT

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 Risk assessment results
• Consequence
• Likelihood
• Risk level and target level (level of risk acceptance)
• Actions to be taken
• Risk owner
• Completion dates
• Reporting schedule

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Risk Treatment
 Options for risk treatment

• Avoiding risk
• Taking opportunity
• Removing risk source
• Changing the likelihood
• Changing the consequences
• Sharing the risk
• Retaining the risk
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Thank you